The most common path to building a great tech company is gaining early traction, raising money from top investors, and then scaling. But it’s never as simple as one, two, and three. Many founders are puzzled by the fact that they have achieved substantial profitability for their business – and not just the “ramen profitability” some early stage startups hit – and still cannot get any investor to sign on the dotted line.
What, then, is the hold-up? As someone who has helped startups raise every round from seed all the way up to Series E, these are the most common issues I’ve observed in the Philippines.
The profitability is artificial.
In an early stage startup, certain sacrifices are made. Key employees may be taking a reduced salary, the founders may be drawing none at all, and marketing efforts may have not started in earnest. The startup will thus appear to be cashflow positive, if only because the founders are not considering all the costs necessary to deliver revenue.
The size of the market is too small.
Even if your startup is profitable, there is the possibility that the market is not big enough. In this case, the startup is not be investable because investors are unlikely ever to see the exponential return they want from their investments.
To combat the market size issue, local founders need to think regional. While the Philippines may be our home and provide us with first-hand exposure to very real problems, we need to ensure that such issues exist across Asia Pacific, or at the very least, Southeast Asia. On its own, the Philippines is rarely a big enough market to convince investors – especially institutional ones – that the pay-off will be significant.
The market may be saturated.
Your startup may be profitable, but only because it has concentrated on a very small niche in an already large, crowded market. As soon as you try to move beyond that initial niche, you will face stiff competition from the market leader and other incumbents. Without a compelling value proposition to seize market share, investors will not be convinced that the return on investment is attractive enough.
There is no growth trajectory. Investors want to see high probability of hockey-stick growth. They want to know that as soon as they infuse your startup with capital, it will start to skyrocket upward in growth. Some startups may be profitable, but show no hint of this kind of growth trajectory. This startup, then, may work fine as a lifestyle business, but not be compatible with investors who want to see the valuation of the business to exponentially increase.
The founding team may not be right.
The importance of the founding team is stated often, but it bears repeating here: It’s easy enough to evaluate your market size, competitive landscape, growth, and other external factors. It’s comparatively much more difficult to turn a critical eye on yourself and the cofounders at your side, even though this is the principal concern for any seasoned investor.
Investors look for “viability” in their founder. They need to know that the founder can build the team and grow the business. Of course, scaling a startup is not just the job of the CEO alone, so they are also concerned about the team composition, including co-founders and early employees. Investors want to know that the startup has the right plan, and more importantly, the right people to execute it once they decide to invest.
In short, even if your startup is profitable, this profitability will be interpreted in a much wider context. Investors will evaluate whether you are in the right industry, with the right market size and competitive landscape, and have the right team.
If your startup falls short on these measures, you’re more likely to stay self-funded, and that’s fine too. You have succeeded where most fail: Creating a small business.
If your startup does check all those boxes, then congratulations. You’re well on your way toward getting the capital infusion that can turbocharge your growth.
Maggie Po is the chief strategist for Full Suite, a finance concierge for Singapore’s top companies catering to their fundraising, runway management, and mergers and acquisitions needs.